Buying a well diversified portfolio of small and micro cap stocks trading at a large discount to book value and/or net current asset value is generally the best way to generate high returns investing in the stock market.

Unfortunately, this strategy suffers from high volatility.

Additionally, there is something psychologically frightening (at least to most people) about putting your hard earned money into businesses that are poorly managed or unprofitable.

The data shows deep value investing works, but it can be fraught with anxiety.

I believe applying value investing in a different manner will still produce market-beating returns (though less than traditional value investing) with significant reductions in both qualitative risk and total drawdowns.

The difference; this investing strategy is about purchasing high quality businesses that tend to have lower volatility than the typical stock and have a strong competitive advantage as well.

The idea is to trade some of the excess returns of value investing for a significant boost in ‘sleeping easy at night’ and not worrying about your investments.

Quality and Value

Value doesn’t have to mean buying mediocre businesses for less than they are worth.

Value can also be found in purchasing exceptional businesses when they are priced as regular businesses.

In doing so, you are still exploiting the same gap between intrinsic value and market prices that traditional value investing benefits from.

The difference is you can purchase businesses that rarely need to be sold.

“It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price. I would rather be certain of a good result than hopeful of a great one.”

- Warren Buffett

A business with a strong,durable competitive advantageand a long history of rewarding shareholders through dividends and share repurchases will compound your initial investment as it grows over time.

These businesses are not common, but they are well known.

Examples of businesses with durable competitive advantages and long histories of dividend growth include;

To find a company’s historical growth rate, the lower of 10 year revenue per share or 10 year dividend per share growth is used. Revenue per share is used instead of earnings per share because earnings tend to fluctuate more year to year than revenue per share. ExxonMobil has managed to grow revenue per share at about 6.3% per year over the last decade. The company has the 41st highest growth rate out of 132 businesses with 25+ years of dividend payments without a reduction.

Notice that ExxonMobil does not stand out in any one category, but performs well over all of them.

It does not have an extremely high yield, or exceptionally low volatility, nor is its growth rate phenomenal.

Overall, ExxonMobil is a solid business that has rewarded shareholders with decades of increasing dividends. The company is not a traditional value stock, but does offer investors solid returns with relatively low risk.

Investing in businesses that seem fairly priced (or slightly undervalued), but offer investors a high likelihood of success and an above average long-term compound average growth rate will likely offer investors strong risk adjusted returns.

ExxonMobil is an example of a company that fits this profile in today’s largely overvalued market.

Investing in high quality dividend growth stocks will not appeal to everyone. I believe it is an excellent choice for those with somewhat lower risk tolerances who may find it difficult to fully commit to deep value investing, but agree with the philosophy of value investing.